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Apple or Tesla Stock – Which Is the Better Buy?

Both tech darlings are hovering around all-time highs. We look to see which is a better buy from here.

Apple (AAPL) and Tesla (TSLA) stock have each recently touched all-time highs. Both are tech darlings, though Apple stock is more popular with money managers thanks to a significant head start. However, Tesla stock is kicking the stuffing out of AAPL year-to-date, up 86% through Sept. 2 compared to 24% for the iPhone maker.

Both stocks obviously are hotter than a pistol. But which one would be the better buy at these sky-high levels? We’ll break down the pros and cons of each company (and their respective stocks) to see.

Apple Stock – Pros

Apple’s fiscal 2013 free cash flow was $46 billion. AAPL used much of that to pay dividends and repurchase shares, but it could just as easily divert a few billion to research and development to more quickly bring to market the next “it” product to succeed the iPhone. In 2013, Apple spent $4.5 billion on R&D; it wouldn’t break a sweat doubling the budget. That kind of cash flow can help you remain patient when others are calling forfaster innovation. Money doesn’t necessarily translate into innovation, but it sure can’t hurt.

Tim Cook has been CEO for three years. In that time, Apple stock has achieved a total return of 102% — 21 percentage points greater than the SPDR S&P 500 ETF (SPY). For some people, that’s not good enough — after all, Tesla stock is up 1,090% in the same period — but considering AAPL hasn’t delivered any new products during his tenure, shareholders should be extremely satisfied that things have gone so well for Apple stock.

Jay Haynes, a San Francisco-based entrepreneur and investor, wrote an interesting blog post in January that suggested Apple stock could be worth $3 trillion. His basis for this number? Growing owner earnings (net income plus depreciation and amortization less capital expenditures) by 5% annually for the next 10 years and 2% per year thereafter. Haynes figures that because Apple’s success rate is far superior to Google’s (GOOG), Apple stock should get a higher valuation. Yet, GOOG stock has the much greater valuation with an EBITDA multiple of 17.7 versus 10.3 for AAPL. At Google’s current EBITDA multiple, Apple would be worth more than $1 trillion. Should Apple deliver another product as big as the iPhone, a 5% growth rate will seem absurdly low.

Apple Stock – Cons

Apple’s cash and marketable securities in Q3 2014 came to $164 billion. It could have been even higher, but the company has taken on $29 billion in long-term debt the last two years to repurchase Apple stock. It’s not the share repurchases themselves that are a problem, but the fact debt was used to make the purchases simply because it wouldn’t repatriate some of its overseas cash (paying 35% tax in the process) to do the deed. This problem will continue to haunt Apple until it decides to bite the bullet and pay the tax, or the U.S. government changes the rules. While corporate tax rates in the U.S. could drop from 35%, I highly doubt the feds will grant big corporations a tax holiday as has been reported in the media. That boat sailed in 2004, and it was a complete failure. Tim Cook and the rest of the Apple brain trust need to in the labs and not testifying to congress.

The iCloud incident this past weekend puts in jeopardy the impact of Apple’s Sept. 9 iPhone 6 launch, which is expected to include an iWallet platform allowing users to make mobile payments. The fact that pictures and stuff can be hacked so easily will remind consumers that their information isn’t safe putting the success of Apple’s mobile payments system in temporary jeopardy. It’s not going to hurt the ultimate success of the iPhone 6, but it could put a big damper on Apple stock.

Tesla Stock – Pros

Any time you can double your return in a single year, you’re doing something right — and TSLA isn’t too far away from that already this year at 86% gains. To put this in perspective, I’ve done a stock screen (courtesy of FinViz) that shows only 20 stocks out of 641 large caps have doubled in price over the past 52 weeks. Tesla technically isn’t one of them, but it does rank in the top 10 percentile. Momentum investors are all over this baby.

The Model X is coming. You can’t be a one-trick pony in the car business, so Tesla shut down its Fremont, California, assembly line in late July to invest $100 million into ramping up its production to accommodate more Model S’s and the new Model X SUV. By the end of 2014, the assembly line will be producing 1,000 vehicles per week. The first Model X vehicles should roll off the assembly line in early 2015. The Model X should open the floodgates for future models and bigger profits, giving this pony another trick.

Analysts are generally bullish on Tesla stock. Currently, nine analysts out of a total of 16 view Tesla stock as a “buy” or a “strong buy,” according to Yahoo Finance. Stifel Nicolaus’ James Albertine raised his company’s target price to $400 Tuesday with a 2017 EPS estimate of $8.28, 35% higher than his previous estimate. Albertine cites increased Model X prices, increased output for both the Model X and Model S, and a non-GAAP gross margin of 33% — 500 basis points higher than where it expects to be by the end of 2014.

Lastly, and not least, is Elon Musk. What can you say about someone who’s built a car company (an electric car no less) almost from scratch and is on the verge of delivering its third vehicle model in its short 11-year history. The man is a visionary that’s rare in corporate America these days. In 2012, I wrote a piece titled Why America Needs More Teslas.In it, I defended Tesla, saying that it truly is making a difference in America. OK, so it’s selling cars that are extremely expensive, but Tesla’s ultimate goal is to deliver electric cars that are affordable — hence the Model III, which is expected in 2017. The man continues to deliver, and I don’t see that changing anytime soon.

Tesla Stock – Cons

While Tesla lost $62 million in the second quarter by GAAP rules, it made $16 million on a non-GAAP basis. How you choose to use this information will likely dictate whether you think Tesla is a good news story or a bad one. That fact is by generally accepted accounting practices, TSLA is losing money — almost $10 for every $100 in revenue. That is never good no matter how you choose to coat your candy. At some point, Tesla needs to fall in line with GAAP.

Giga-what? Tesla’s $5 billion gigafactory that it’s building in partnership with Panasonic(PCRFY) could have as much as 57% overcapacity when it opens for production in 2017. Lux Research, which specializes in emerging technologies, believes Tesla won’t be able to unload as many battery packs as it thinks after committing those needed for the Model III and other Tesla vehicles. Tesla is investing $2 billion in the project and expects to be able to produce 500,000 lithium-ion packs by 2020, approximating the number of cars it expects to produce that year. This gigafactory could be the biggest mistake in Elon Musk’s six-year tenure as CEO.

Apple or Tesla Stock – Which Is the Better Buy?

This is a really difficult decision.

Both companies have a lot of positive attributes. Apple for simply innovating for such a long period of time and Tesla for upending the automotive world.

Clearly, though, Apple stock involves less risk.

While my answer is going to appear like a cop-out, the answer is, “it depends.” Specifically, on risk.

I’d suggest you buy an ETF that holds Apple and/or Tesla stock if you’re 10 years or less from retirement. If you’re between 10 and 20 years to retirement, I’d go with AAPL stock. And if you’re 20 or more away from hanging them up, I’d go with Tesla stock.